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Emkay
DCB Bank (Buy)
CMP: ₹81.55
Target: ₹118
The management plans to accelerate its distribution strategy, by adding 150 branches and 1,700-2,100 employees over the next 24 months. Over FY16-17, the addition of about 150 branches is likely to lead to productivity being a drag on earnings growth — we estimate cost-income to rise from 59 per cent in FY15 to 63 per cent in FY17e. Yet, operating leverage could improve meaningfully from FY18 onwards, with the likelihood of 1) higher-than-past business growth once the macro-environment improves; and 2) faster break-even of newer branches in Tier-2 to 6 locations where operating costs are relatively low.
While execution risks linger, the management has indicated that its expansion plans are flexible, and can always be recalibrated based on the prevailing macro-economic environment. After the recent price correction, we upgrade the stock from ‘accumulate’ to ‘buy’. We expect robust profitability over FY15-18e, led by the bank’s prudent business growth strategy and superior asset quality.
Risks: Change in management, sharp rise in credit costs, irrational competition from large banks.
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